Schwab’s announcement late last month that it would acquire competing custodian TD Ameritrade had many stakeholders and advisors questioning what the combined company would mean for smaller registered investment advisors. TD Ameritrade has long been known to be active in that space; Schwab's reputation is that it is not interested.
But head of Schwab Advisor Services Bernie Clark said that the firm does, in fact, custody for a significant number of small RIAs. Of the 7,500 firms it serves, 4,500 have under $100 million in client assets. Many have under $10 million.
“We have been, and will remain, and will always appreciate that business and growing it,” Clark said, in an interview with WealthManagement.com.
The firm assuaged some small RIA concerns last week when it announced the hiring of Tom Bradley, the former president of TD Ameritrade’s retail and institutional businesses, to focus on the segment that works with RIAs with $100 million or below.
Clark said the firm has made a number of changes over the past few years to make it more attractive to small RIAs.
For one, it lowered the service fee on mutual fund transactions to $25. It also introduced Portfolio Connect, its portfolio management system; the free tool is intended for firms managing less than $100 million in assets that are custodied at Schwab. “It’s another example,” he said. “Many of the larger clients don’t use it. They are out in Black Diamond or Tamarack and using other capabilities. So you can’t compare the need of the two very easily.”
Many small RIAs also use Schwab’s consultative services, which are free, and the firm is screening more data and making more information available to those firms, Clark added.
One example of the evolution of its service models is to use virtual consultation for small RIAs, such as with its cybersecurity practice management module. For some advisors, it's more convenient to communicate with virtual communications, at their convenience, than it is to schedule in-person visits.
“Small firms can’t always send someone to a conference,” Clark said.
Soon after Schwab confirmed rumors that it was acquiring TD Ameritrade, smaller RIAs expressed mixed feelings. TD Ameritrade was the go-to custodian for some advisors who were too small for Schwab. While some of those advisors welcomed the Schwab name being attached to their business, there were others who felt concerned that their customer experience would be downgraded (i.e., going without individual relationship managers). There’s been some speculation that Schwab recently moved to cut all access to individual relationship managers for RIAs custodying less than $200 million.
Clark said that the “call center” has long been part of the custodian’s service model, but they are evolving it to make it more efficient. He said the firm recently regionalized its call center by time zones, with 1,500 direct people supporting the business in Phoenix, Orlando, Fla., Denver and Westlake, Texas.
The firm did shift from smaller 10-person teams that would take an advisor’s call, which will now go first to larger teams at the call centers, but Clark said that was simply to make call routing more effective to get an advisor through to the right spot. Advisors of all levels will continue to have dedicated support teams. “There’s always a human relationship,” he said.
Clark said the firm is trying to build toward more specialization, both among advisory firms and how those firms interact with the custodian, and an AUM does not equate with the kinds of specialization or complexity an advisory firm needs. For instance, a $200 million AUM family office acts very different than a $200 million AUM firm serving over 200 clients.
He said they need to treat consolidators and aggregators in a different way as well. “They have a lot of assets, but they don’t act like a traditional large firm. Is one more important than the other? No, it’s just they need different handling going forward.”
In the wake of the zero-fee trading commission cuts, Clark said they are revisiting their pricing models for many advisors depending on the advisor—whether or not they pass trading fees to the client or pay them inside of a wrap fee—and how many trades those advisors execute. He said they were revisiting fees on a “case by case” basis to create a “fairness factor” based on the fact that pricing models have just changed.
"We've always had very customized pricing at the advisor level, depending on the concept they were coming in with, because many of them were breakaways and may have expectations with their clients that they need to continue to meet. And so we'll see as pricing continues to become simplified."
"The economics of our advisor model has been getting tighter and tighter," he said. "If you think about gross revenues, we're sort of in the double-digit basis points category of gross revenue. If you look at expenses against those revenues, we're in the high single digits.”
“This was a business that used to have a 30-basis point spread as a custodian. That is no longer the case. The spread now sits at more like five to six to seven basis point range,” he said. “So as we think about our relationships as a custodian, and evaluate the services we provide, it's incredibly important, our size, and making sure that scale is favoring us in those ways."
Clark said he wanted to set the record straight after the speculation that circulated in the wake of the announced merger. "I've read a lot about what we're doing, and if I weren't in the business and didn't know the details, it would scare me," he said. "But that's not what we are doing. We've been two years in the remaking of our service models, which includes relationship management and service training to meet the needs of the clients."
"It would be silly of me to say that size of client doesn't often reflect the complexity of the client because it does. But we’re more interested in making sure that our models are meeting the complexity and the needs of the advisor, and then clustering those similar advisors in those kinds of ways.”